Issues in Brief

The Building Blocks of Regional Competitiveness

Senior Economist
February 5, 2013

Introduction: The Rise of Region-Based Development
Gaining currency among the plethora of ideas for a post-2009 economic revival in the United States is the optimality of a region-based economic and manufacturing development strategy. In a noted paper, Michael Porter of the Harvard Business School observes substantial differences in economic performance across regions in virtually every nation.[1] National economic strength, as Porter writes, is a composite of very different levels of regional performance, an idea reinforced by recent articles from the Brookings Institution that advocate for “advancing advanced manufacturing region by region.”[2] In this Issues in Brief, I discuss a conceptual building block of regional economics—the cluster. While clusters were born on the pages of economic literature, their identification and development is now essential for policy and planning in many states and localities. Cluster strength, as the emerging evidence is showing, has implications for regional and ultimately national competitiveness.

The Cluster Concept
On a gut level, manufacturers should understand the cluster concept very well given their production world of suppliers, customers, competitors, R&D laboratories, governmental organizations of various kinds, and universities. Porter observes that a striking feature of regional economies is the presence of such clusters, which he defines as a “geographically proximate group of interconnected companies, suppliers, service providers, and associated institutions in a particular field linked by externalities of various types.”[3] The externalities include common technologies, skills, knowledge, and purchased inputs.

Figure 1 shows the diamond model that Porter has used to illustrate his cluster concept. He explains the corners of his diamond in a 2000 article,[4] first noting that factor inputs include tangible assets such as physical infrastructure, information, the legal system, and the output of research institutes. The context for firm strategy refers to the legal and institutional norms governing the type and intensity of local competition. Related and supporting industries include local suppliers.

Benefits of Strong Clusters
Clusters have been the subject of a sizable research program. Porter and other economists have employed statistical techniques to measure their impact on innovation, entrepreneurship, wages, employment, and competitiveness. A July 2012 paper offers significant insights.[5] The authors note that any investigation of regional performance must account for two competing economic forces: convergence and agglomeration. Convergence occurs when the potential for growth is declining in the level of economic activity as a result of diminishing returns. An increasing number of firms in the same industry utilize the limited inputs that exist in any one geographic area, and growth of that industry becomes less favorable to the region over time. Agglomeration is the opposite. In the presence of agglomeration economies, growth is increasing in the level of economic activity.

Agglomeration is generally thought to arise from interdependencies across complementary economic activities. If both convergence and agglomeration effects are present, regional economic performance will reflect a balance between the two. The authors find that while convergence is likely to be salient within narrowly defined industries, strong agglomeration forces operate across industries within a cluster.

By sharing common technologies, inputs, and cluster-specific institutions, industries within a cluster benefit from complementarities. Specifically, the authors find that industries participating in a strong cluster have higher employment growth, accelerated wage growth, and stronger patenting and entrepreneurship activity than would otherwise be the case. Research seems to find that new industries are born out of strong clusters.[6] The authors suggest that their findings highlight the value of regional policies that prioritize complementarities across related economic activities.

Critique of the Cluster Paradigm
As with any paradigm that attempts to model complex interrelationships, it is important to be aware of shortcomings as well as strengths. A number of articles, in the spirit of advancing the cluster framework, have discussed problems with the existing model.[7]

One problem arises when analyzing the interconnections within a cluster—the core of the theory. Input-output analysis is one of the few useful tools for such a task but determining the standard for “substantial” connections among the components of a cluster remains difficult, not well defined by the current state of the model. Further, input/output analysis only captures monetary transactions, not such factors as rivalry, collaboration, and knowledge spillovers, all of which are critical to the dynamism that well-developed clusters are thought to bring to a region. In short, we need more developed methods for quantifying cluster activity.

Other critiques discuss the need to more systematically account for industry variation. For example, it is important to consider the relatively greater dependence of high-tech clusters on strong links with research-generating institutions. And many note the necessity for a more dynamic paradigm to spawn much-needed understanding of how clusters appear, evolve, and change. Dynamism in the cluster model would be useful for capturing the impact of innovation—by definition a change-stimulating process—on a regional level.

Conclusions
As the cluster concept evolves, the critiques will be addressed and incorporated into an expanding model of regional activity. The insights that cluster research has already generated are useful for understanding manufacturers’ location decisions. Certainly, the presence of strong clusters that facilitate a manufacturer’s raw materials, human capital, and research needs are an important influence on that company’s decision to locate within a region. In developing regional competitiveness, policymakers need to consider the gravitational pull of strong clusters.


Footnotes

[1] Michael E. Porter, “The Economic Performance of Regions,” Regional Studies 37, no. 6&7 (2003): 549-578.

[2] Mark Muro, “Advancing Advanced Manufacturing Region by Region,” The Avenue blog, Brookings Institution, February 27, 2012, www.brookings.edu/blogs/the-avenue/posts/2012/02/27-manufacturing-muro.

[3] Porter 2003, p. 562.

[4] Michael E. Porter, “Location, Competition, and Economic Development: Local Clusters in a Global Economy,” Economic Development Quarterly 14, no. 1 (2000): 15-34.

[5] Mercedes Delgado, Michael E. Porter, and Scott Stern, “Clusters, Convergence, and Economic Performance,” NBER Working Paper 18250, July 2012.

[6] The authors note that the hypothesis underlying these results holds for any measure of cluster strength, including employment, wages, and patenting.

[7] See, for example, Yasuyuki Motoyama, “What Was New About the Cluster Theory? What Could It Answer and What Could It Not Answer?” Economic Development Quarterly 22, no. 4 (2008): 353-363.


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